Domande Pensions

PENSIONS QUESTIONS: WHY DO THE INSURANCE COMPANY WANT TO AVOID SMALL CLAIMS?

1) FRANCHISE DEDUCTIBLE AND PROPORTIONAL DEDUCTIBLE.

2) FRANCHISE DEDUCTIBLE AND FIXED AMOUNT DEDUCTIBLE.

3) FULL COMPENSATION.

Under the full compensation arrangement, the insurer pays in full the loss suffered by the insured or by a third party. This type of arrangement costs more and gives the highest protection available. The insurer will include the franchigia and the mark-up, different types of agreements. So, the claim function refers to the fact that the claim is a function of the loss and the agreement that is underlead.

Arrangements where the claim amount is equal to the loss amount are unsatisfactory for the insurer, since:

• it is exposed to the risk of large claims.
• he can face small claims, which are usually high in numbers, and carry processing costs which may exceed the benefit amount.
• The insured could be careless in preventing accidents, given that the cost of a claim is fully charged to the insured.

insurer.Small claims can be avoided through deductibles..According to a franchise (or minimum) deductible the insurer only intervenes if the loss amount is above a given threshold, the deductible d. in this case if the claim is higher than the deductible d, the amount reimbursed is exactly d.

According to a fixed-amount deductible, an amount d is always charged to the policyholder; clearly, if the loss amount is lower than d, there is no payment by the insurer. In this case, before the deductible amount there is no reimbursement. If my amount is beyond d, I can ask for reimbursement, and this will be the loss deducted the amount d.

A proportion α of the loss (0 ≤ α < 1) is charged to the insured under the proportional (or fixed percentage) deductible. In this case, whatever the claim is I get only an X percentage of refund. This case isn't in Motor Car. The insurer is willing to introduce the deductible because the process should be started for every claim (ex. For a claim

of 50€ there is no sense to start a process that cost more, so they have to start the process for small claims very frequently, so more costs). The higher is the loss amount, the higher is the cost charged to the insured.

Also as concern the limit function, we start with the full compensation and we introduce the maximum, that is what the insurance must pay in the case of a big accident.

124) DEFINED BENEFIT AND DEFINED CONTRIBUTION.

5) DIFFERENCE BETWEEN ACCUMULATION AND DECUMULATION STAGES.

6) WHO HAS THE RISK BETWEEN DB AND DC.

The Defined Benefit pension plan is a traditional, older style of pension plan where workers' retirement benefits are calculated and defined by a formula that considers:

• The years of service at the company
• The salary history

It can be a fixed annual amount or, more commonly, a proportion of the member's salary prior to retirement. The proportion depends on the number of working years, while the salary prior to retirement can be the salary received in

The last year prior to retirement or an average of the salary received in each number of years prior to retirement. Talking about DB we need to also consider the projected benefit obligation, that is an actuarial measurement of what a company will need at the present time to cover future pension liabilities. It is used to determine how much must be paid into a DB pension plan to satisfy all pension entitlements that have been earned by employees up to that date, adjusted for expected future salary increase. PBO assumes that the doesn't end in the foreseeable future and is adjusted to reflect expected compensation in the years ahead. It considers a lot of factors, including:

• The estimated remaining service life of employees
• Assumed salary rises.
• A forecast of employee mortality rates

A Defined contribution plan is a retirement plan in which employees contribute a fixed amount or a percentage of their salary in an account that is intended to fund their retirements. The company will

to achieve the desired retirement income should be determined during the accumulation stage. This requires careful consideration of factors such as the member's age, risk tolerance, and expected retirement age. - During the accumulation stage, the pension plan should offer a range of investment options to suit different risk profiles. These options may include conservative funds for those nearing retirement, as well as more aggressive funds for younger members with a longer investment horizon. - The investment strategy should aim to achieve a balance between growth and risk management. This may involve diversifying investments across different asset classes, such as stocks, bonds, and real estate, to spread risk and maximize returns. - Regular monitoring and review of the investment strategy is essential to ensure it remains aligned with the member's goals and market conditions. Adjustments may need to be made periodically to rebalance the portfolio or take advantage of new investment opportunities. - In the decumulation stage, the pension plan should offer flexible withdrawal options to accommodate the member's changing financial needs. This may include the option to receive a lump sum payment, regular income payments, or a combination of both. - The pension plan should also provide access to financial advice and education to help members make informed decisions about their retirement income. This may include workshops, online resources, and personalized guidance from financial professionals. By following these principles, a well-designed DC pension plan can provide members with a secure and sustainable retirement income, while also allowing for flexibility and choice throughout their journey.

During the accumulation phase, it is important to consider the plan member's attitude towards risk, including their degree of risk aversion and the riskiness of their labor income and human capital. Higher levels of risk aversion lead to a lower annuitization age. Therefore, the pension plan should be designed from back to front, with the goal of delivering an adequate targeted pension with a high degree of probability.

In conclusion, DB pension plans are not as portable as DC plans, which allow individuals to rollover a portion of their retirement benefits into another plan when they change jobs. In the last 10 years, DC assets have grown by 9% and DB assets have grown by 4.8%. Over the last 20 years, the growth rate of DC assets is 8% and for DB assets is 5%.

47) PROPORTIONAL ARRANGEMENTS

Reinsurance arrangements can be classified according to several criteria. In particular, the classification into global reinsurance arrangements (on a

portfolio basis)and individual arrangements (on a policy basis). policy basis,- When a reinsurance arrangement is defined on a the relevantparameters concern the individual risks (for example: the share in the quota-share reinsurance, the retained line in the surplus reinsurance).portfolio basis- The parameters of reinsurance arrangements defined on a relateto quantities concerning the portfolio total payment (for example, the priorityand the upper limit in the stop-loss reinsurance).According to another criterion, reinsurance arrangements can be classified intoproportional and non-proportional arrangements.- In a proportional reinsurance arrangement, claims and premiums aredivided between the cedant and the reinsurer in the ratio of their shares in thereinsurance contract. Hence, the sharing of claims is determined when thereinsurance arrangement is defined (ex. quota-share and surplus reinsurance).- In a non-proportional reinsurance arrangement, the rule for the sharing ofclaims is

stated when the reinsurance contract is defined, but the actual sharing of claims is determined depending on the severity of each claim, or the number of claims in the portfolio, or the total portfolio payment (ex. Catastrophe reinsurance)

58) TECHNICAL ACTUARIAL BALANCE

The expected value of Y (random present value) is the actuarial value of the benefits: its calculation consists in discounting the benefits and relies on a life table and the interest rate i, which constitute the technical basis. To define the terminology used to denote cash-flows related to life insurance contracts, and the notation for the relevant actuarial values, we refer mainly to benefits, when evaluating inflows arising from periodic premiums, as well as outflows related to expenses.

The actuarial value of 1 monetary unit payable at time m if the insured (currently age x) is alive at that time, is given by:

This benefit is provided by the pure endowment insurance.

The pure endowment is for a person who has age X.

requires receiving 1 £ at the end of the period o m years when we will X+m age, he will receive this amount of money which is 1£ in case of survival. If he does not survive nothing is due.

1+i = time between I sign the contract and receive the money.

(1+i)^-m = is the present value of the sum discounted for m years at the interest rate i. until now is only the financial matter of having this sum for tot years.

mPx = probability that this person will survive.

Final result is something structurally below 1: equal to 1 when interest rate is 0 and the prob of die is 0.

Consider a sequence of unitary amounts, payable at the beginning of each year if the insured is alive. The benefit is provided by a whole life annuity (paid in advance). Its actuarial value is given by:

Ax = I will receive money in advance to the time interval. Is the submission of several pure endowment policies, like seen before. All life annuities.

X = age at which I receive this

H=0 = is the submission

W = ultimate age to

reachw-x = number of years that are in front of this person for which I want a sum of 1 to be paid on a regular basis (every year) until he dies. I don't know when he will die. Residual maximum lifetime.

hEx = different present value, considering the probability of survival in 1, 2... years. All are average values (of probability to die - not personal probability).

As soon as I sign the contract and pay immediately, I will receive an amount of money, but this is not the case with pensions. We must find a way to represent what is called a defended whole life immunity (not start now, depend on time as pensions). So, we need to compute what is called the temporary life annuity.

If the annual amounts are payable for at most m years, we have the temporary life annuity (paid in advance), whose actuarial value is:

M = is the duration of time that measures how long is the time when you could receive this annuity.

If on the other hand you consider this term, so just a portion of the timeline,

we have a temporary annuity. Important because If I can compute the pure endowment now, I can also compute the temporary part. That is given by the difference between the whole life – the deferred part, that is the next one. Conversely, if the annual amounts are payable as long as the insured is alive, but starting from time r, we have the deferred life annuity (paid in advance). The actuarial value is given by: R = deferred time 6Ax – axr = I start from the lifetime annuity ax, that will go up to the latest age available/possible, from which I will deduct a part of annuity that I consider up to the age x+i. This is the formula we need for pensions: If I sign a contract today and I have 25 years (x equal 25) and r is 67-25=42. So, I need to wait 42 years before being able to get something. And this person to get anything mu